Measurements of Achievement: Stafford Beer's commentary, a timely reflection

 

Beyond the Balance Sheet... on Actuality, Capability and Potentiality

20 years ago Stafford Beer defined the Viable Systems Model, or VSM. There are many more things for me to write on his body of work. I was first introduced to this whilst doing my MBA at Victoria University of Wellington by Professor John Brockelsby and also have the privilege of learning from other great thinkers and teachers like Professor Stephen Cummings, Professor Todd Bridgman and Professor Arun Elias (more on them in future posts and potentially on the Looking Fourth channel). I will also be posting a short summary of the book referenced here, The Brain of Firm, on the complementary blog & Reading Fourth.

"Here we finally detect the manager who is doing most these days to wreck industrial enterprise."

Stafford Beer,

The Brain of the Firm,

1974

Watching the latest round of Microsoft layoffs off the back of earnings that significantly exceeded expectations, these words penned by Stafford Beer in 1974 jumped off the page at me recently in my walk through Brain of the Firm and then in quick succession The Heart of Enterprise.

This from the Chapter 11 on Corporate Structure and its Quantification.

"Here we finally detect the manager who is doing the most these days to wreck industrial enterprise. 

He (she) is the irresponsible cost-cutter (note! this does not say that cutting costs is irresponsible). The manager I speak of raises productivity (and hopefully profits), and thereby acquires a marvelous reputation. This he (she) does by squandering his or her latent resources. They cut budgets, they let go valuable people, they fail to implement research results should this involve the slightest effort, expenditure or risk.

Thus they triumph as tough and practical. In the orthodox scheme of reporting, no measure will reveal the damage they are doing!

There is no element in either the profit and loss account or the balance sheet which declares them to be murdering the company's reputation in markets for products, for suppliers, or for staff which may well be needed in a few years time".

He then goes on to define new measures which I will cover shortly. He continues:

"(using the new measures) the Manager's productivity will be seen to increase, for indeed it does, and that doubtless means that this year's profits will rise. BUT his latency index will deteriorate and so (probably) will his overall performance.

So keep your eyes on profits in a few years time." 

So what are these new measures he defines?

There are three measures or levels of achievement and three ratios.

& The Measures

ACTUALITY: simply what we ARE managing to do now with existing resources, under existing constraints. This is particularly relevant in the "do more with less" era.

CAPABILITY: what we COULD be doing, still right now, with existing resources, under existing constraints, if we really worked at it. This has implications on culture, motivation, the employer-employee social contract, tools and a range of other influences in the modern way of working.

POTENTIALITY: what we OUGHT to be doing by developing our resources and removing constraints, although still operating within the bounds of what is already known to be feasible. For me as a servant leader this is where I can make the biggest impact on helping realise the potential of the people I work with, by removing constraints and letting them operate as a level of empowerment within the construct of the firm.

& The Ratios

PRODUCTIVITY: the ratio of actuality and capability

LATENCY: the ratio of capability and potentiality

PERFORMANCE: both the ratio of actuality and potentiality AND also the product of latency and productivity

He goes on to define the planning levels where we're managing to, which is an important context for what we have seen play out in Big Tech in recent years. 

Managing Actuality he describes as programming, not in the computer science sense, but in the Tactical, Short-Term thinking when we're chasing a response from Wall Street and the immediate response in share price.

Managing to Capability he describes as Planning by Objectives, or Strategic Management. Finally, managing to Potentiality he describes as Normative Planning, which I think of as being better aligned to what Simon Sinek lays out in his book "The Infinite Game".

Shifting away from straight P&L and Balance Sheets and into these ratios becomes enlightening because of the way the ratios work. It becomes very obvious very quickly when you start plugging in numbers as to what the longer term impacts are on the POTENTIAITY of the firm. You could model this using John Sterman's approach to System Dynamics which would also reveal the relationship in a different way.

What is this really saying? it's saying that the drive for short term share price gains, which is increasingly a a bigger component of executive compensation, is continually eroding the long term potential of the firm. It is limiting the Capability and eventually the Actuality of the firm, and as Beer says; before you realise you've done it, it might already be too late.

References:

1.The Brain of the Firm, Stafford Beer. 1974, p164-166 here